Q1 2023 America's CAR-MART Inc Earnings Call

Good morning, everyone. Thank you for holding and welcome to America's car Mart's first quarter fiscal 2023 conference call.

The topic of this call will be the earnings and operating results.

First quarter of fiscal year 'twenty two 'twenty three.

Before we begin today's call is being recorded and will be available for replay for the next 12 months.

As a reminder, some of management's comments today may include forward looking statements, which inherently involve risks and uncertainties that could cause actual results to differ materially.

Present view.

These statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.

The company cannot guarantee the accuracy of any forecast or estimate.

Does it undertake any obligation to update such forward looking statements for more information regarding forward looking information. Please see part one of the company's annual report on Form 10-K.

For the fiscal year ended April <unk> and.

'twenty two.

And its current and quarterly reports furnished to or filed with Securities Exchange Commission.

On forms 8-K and 10-Q.

Participating on the call. This morning are Jeff Williams, the company's President and Chief Executive Officer, and Vickie, Judy Chief Financial Officer, and now I'd like to turn the call over to the company's Chief Executive Officer, Jeff Williams.

Yeah.

Well Hello, and thank you for joining us this morning, and thank you for your interest in America's car Mart.

Unit volumes for the quarter were up two 1% with revenues up 23%.

Given the inflationary operating environment.

And the lack of product at lower price points, we're convinced that we're picking up solid market share.

And many potential customers are staying out of the market because of affordability concerns.

Consumer demand for our offering is expected to remain high and increase moving forward.

We believe that challenging macro conditions will eventually improve.

Volume opportunities for us will only get more attractive.

We will remain focused on the things we can control the initiatives we have in place to allow us to be a much larger more profitable company over time, so with headwinds switch to <unk> will be ready to leverage our infrastructure even more with.

Operating a high touch high friction segment of the market.

And consumers need a lot of support before during and especially after the sale.

The infrastructure to support a growing customer base is extremely important.

Our customers peace of mind by keeping them on the road, we have a long history of success through many different business and credit cycles and.

And we believe we do it better than anyone.

Our customers are most certainly feeling the negative effects of the absence of stimulus.

Combined with high inflation, but the job market is strong and wages are increasing and at the same time car prices are leveling off some.

We believe that wages will continue to increase at a healthy clip as we move forward.

Also specifically gasoline prices are down materially in the areas we serve.

Food costs are expected to moderate some.

As always we will support each customer one at a time and the best way possible to ensure that we keep them on the road. That's what we do that's America's car Mart.

I'll now turn it over to Vicki to go over some numbers.

Hey, good morning. Thank you Jeff. Thank you all for being with US This morning.

The 2% sales volume increase at 20% increase in the retail sales price and 32% increase in interest income drove a 23% revenue increase over the prior year quarter, our per store productivity was flat compared to last year at $33 six units.

This demonstrates the demand for our product even in a tough environment with high overall inflation vehicle prices and softening demand in the overall market.

Our gross profit dollars per unit increased by 12% over the prior year and up slightly from the sequential quarter. The gross profit percentage was 35, 7% down from the sequential quarter at 36 and a half.

<unk>, primarily resulted from the increase in the average selling price coupled with the inflationary pressures and increased costs for repair parts transportation fees fuel cost and other cost of sale expenses.

On wholesale.

For the current quarter net charge offs as a percentage of average finance receivables was five 6% and in line with our prior five year average and compared to four 3% in the prior year quarter.

So our historical comparison pre pandemic net charge offs were five 4% for the quarter ended 731 19.

Our 10 year average for first quarters.

At 6%.

Primary driver of the increased charge offs was an increased frequency of losses, coupled with a slight increase in the relative severity of losses or.

Our quality of customer does continue to improve and we remain confident.

That our customers need the dependable transportation and reliable service that we offer and that coupled with the investments. We're making we believe we will be able to continue to perform well in a more normalized credit environment.

Our recovery rates were essentially flat at approximately 30%.

Our account 30, plus past due was at three 6% compared to three 3% in the prior year quarter and in line with historical quarters pre pandemic three 8% at 731 19.

Our total collections were up over 13% to 148 million and total collections per active customer per month were up 6% to $516.

It is important to note that as our receivable balance grow as a significant portion of the provision expenses related to the allowance reserve on the larger portfolio balance. This was an increase of $19 million for the quarter to a total allowance of $266 million at July 31.

Finance receivable principal balance grew by $84 million during the quarter and $295 million over the last 12 months.

Our deferred revenue on our balance sheet from our ancillary products is that a $100 million and has increased by $34 million during the last 12 months.

The average originating contract term for the quarter was 43 months compared to $39 four for the prior year quarter.

And up from $42 one months sequentially.

The average selling price was up $3050 with a three six month increase in the term compared to the prior year first quarter.

The selling price increase of approximately 10% related to the enhanced service contracts that we fully rolled out in early 2021.

We work hard to keep the term as short as possible, while making the payment affordable for the customer.

Our weighted average contract term for the entire portfolio, including modifications was at 44 months compared to $38 seven for the prior year quarter.

And the weighted average age of the portfolio increased 10% from approximately $8 two months to nine months.

We have several initiatives in process in a challenging labor an inflationary environment, we continued to adjust our business to more of a sales company that can collect well, while enhancing our digital and our technology in order to serve a larger number of customers over time.

<unk> committed to doing this in an efficient and effective manner. So that these additional costs are leveraged with increases in productivity and sales volumes over time, our SG&A spend increased $4 $4 million over the prior year quarter and increased $2 3 million over the sequential quarter.

One $2 million of the sequential increase related to the annual first quarter stock option grants.

We had nice leveraging at 14, 4% of sales versus 15, 7% in the prior year quarter.

The juruti of the increased investment is in payroll and related benefits and increased collection costs.

We have a long history of leveraging our SG&A spend and that's going to be part of our commitment moving forward as well.

At quarter end, our revolving debt was approximately $189 million, we had $4 4 million in cash and approximately $125 million in additional availability under our revolving credit facilities based on our current borrowing base of receivables and inventory.

Our securitized nonrecourse notes payable was $323 million with $37 million on <unk>.

Restricted cash related to those notes.

We completed the securitization at the end of April which is at a fixed rate.

All of our interest has been impacted by recent fed rate increases.

Up to 2% since our year end and as discussed we expect to be doing another securitization in the third or fourth quarter of our fiscal year.

Our total debt net of cash to finance receivables ratio is 39, 7%.

About two 5% of the debt increase for the quarter relates to inventory increases.

As mentioned in the press release, we had some inefficiencies primarily related to supply chain issues and reconditioning time parts and shop delays all while trying to keep the dealership stocked with the appropriate mix in quantity and reach already units.

We will be focusing on operational improvements and efficiencies the market improves.

Our solid balance sheet, our strong operating history, and our access to the securitization market should provide us with the appropriate access to capital moving forward as we fund our growing receivable base with higher retail sales process and longer terms the business requires a higher debt level.

However, our cash on cash returns are still very attractive and growing our <unk> and our customer base is the best use of our capital.

During the quarter, we grew finance receivables by $84 million, we increased inventory by $30 million, we repurchased 5 million of our common stock and funded $8 million and capital expenditures.

<unk>.

Thank you and I'll, let Jeff close this out.

Thank you Vicky.

This business. We're in is hard, but we've never been more optimistic about our potential.

Last year at this time consumers had received the largest in the last of the stimulus checks.

The advanced child care tax credits were in the market.

<unk> unemployment benefits, we're still out there in consumers' hands.

All of that stimulus is now gone.

Looking at a 9% inflation.

Fly is tight we think it will ease but there has been massive changes in our industry that have happened at speeds never seen before.

However, we are seeing some leveling off of prices.

Our customer lives paycheck to paycheck and affordability is more of a challenge than ever right now.

With all that said, we believe that we're the best at what we do.

We have a long proven track record of working with our customers.

We're beginning to see better customers come down into our market from above.

This customer we serve absolutely positively needs personal transportation.

There are certainly other available options, we believe our basic transportation option is clearly the best.

We will again show itself to be just that overtime.

We have an enormous market share acquisition opportunity.

We believe the competition is being disrupted far worse than we are and we intend to capitalize.

We have significant upside from gaining market share in areas that we already serve.

We averaged 629 customers per dealership and we believe that should be 1000 or more over time.

The current used car price environment is not affordable for all.

This does not mean that it cannot persist for longer but the prices of vehicles are disconnected from the economic reality of a section of the population and we believe this situation will gradually rectify itself over time.

We have the scale the customer base the industry expertise and the balance sheet to play some offense in tough markets like this.

We're making significant investments doing what we think we need to do to be a far larger player that can better serve our customers at a high level.

We are currently supporting almost 97000 customers most living paycheck to paycheck, and we will keep them on the road and work with them through life's challenges, including Pandemics.

Assertion.

Inflationary periods and other disruptions just like we have for 41 years we.

We have an obligation to serve more customers.

And in three five and 10 years more people will need us and we will be ready.

I am proud of our associates and the incredible work, we do every day to support our customers and to support each other.

We will now open it up for questions operator.

Thank you as a reminder to ask a question.

Star one one once again Thats star one one for questions.

Please standby, we compile the Q&A roster.

Okay.

Our question comes from the line of John Rowan from Janney. Your line is open.

Good morning.

Okay.

You guys said in the opening comments that.

Some of the charge off was both frequency and severity.

As the severity.

More of a function of.

Duration lower down payments.

Or is it.

A function of car prices leveling off.

The severity just relates to the higher balances that the customers have at the time of charge offs. So as.

Is that average selling price and the average amount financed has increased over.

The recent quarters, Thats, where the severity comes into play.

Okay and then.

You said, obviously, you're teeing up a new <unk>.

ABS can you just.

Give us what the marginal cost of debt is now on the revolver versus where you think this ABS will price.

Sure.

Yes currently.

Two percentage points different.

Sure.

100 basis points lower yes.

Okay.

Alright, Thats all I needed to know thank you.

Thank you.

Thank you one moment our next question.

Okay.

Okay.

Our next question comes from the line of Vincent <unk> from Stephens. Your line is open.

Hey, good morning, Thanks for taking my questions.

Just first a broad overview questions, but I know, there's a lot of changes going on in the macro right now, but as youre looking at this past quarter.

Just wondering if you think that.

If things stabilize in the business such that.

A good quarter for us to be forecasting copper of course.

There's something else Brad.

Should we be thinking about this year in near future.

Be anticipating about in modeling you guys going forward.

Thank you.

Okay.

Well.

We feel like.

Again car prices are leveling off and wages are going up so.

So we feel good about both of those components of the look forward.

We are going to serve customers at a very high level and keep them in there in their cars on the road.

So we're optimistic looking forward.

<unk>.

Anticipate that results are going to be solid.

As we look forward and again, we do expect wages to continue.

To pick up in the strong labor market is strong and the leveling off of car prices.

Putting our customers and better cars.

For better prices move.

Moving forward the timing of that is.

As a little unknown.

But we do expect over time to see some good benefits and some <unk>.

Some improvements as we go forward.

Okay understood. Thank you.

For the loans that you're originating today, you were talking about kind of averages.

Like average term.

Sales price and so forth I guess for you originated today could you talk about what we can share.

Sure.

A few loans, you're seeing where you're comfortable taking term.

And then also where are you comfortable taking.

The average selling price.

Yes, I mean, we are.

Again, we're seeing some prices level off we are intentionally looking for less expensive product, it's a little tough to find right now so a little of it this is out of our control.

We are laser focused on putting a better product.

In a less expensive product out there.

The shortest term that we can we like to put our customers in an equity positions keep them in good positions.

And keep that term as short as we can and at the same time not lose lose good customers.

And make sure that payment is affordable so we are focused on.

Taking advantage of some market.

Today's with prices leveling off.

We'd love to see that sales price level.

Level off in that term level off at the same time and really.

As we look forward.

We can see some opportunities down the road.

For some term reductions even as prices move more in line over time.

Okay. Thank you and last one from me.

SG&A expenses, I understand you're making more investments in the business and that's up about 11% year over year.

Where do you feel comfortable.

SG&A.

I guess, what should we be thinking about that on a go forward basis. Thank you.

Yes, again, we are still investing Jeff mentioned.

Wages going up so when theyre going up for our customers. They are also putting some.

Pressure on wages for our associates as well.

And as you know in this high touch business, our associates and the service they provide to our customers are very important.

So to Jeff's point, we are going to continue to leverage this as we move forward we've always been.

A very.

Very focused on efficiencies and frugal with our expenditures just like our customers have to be so we will continue to look to leverage that again, it's hard sometimes on a quarter over quarter.

<unk>.

The largest part of our investments have been made that there'll continue to be some as we move forward.

Okay, Great I'm sorry, Thank you one more just quickly on <unk>.

Interest expense whats the rate of quarterly expenses to be forecasting going forward.

Yes, a lot of that will depend on of course, what the fed does coming up over the next few quarters. I mean, I think there are still expectations that there will be.

Perhaps even three more rate increases this year.

We look forward to the securitization market and what the benchmarks and the spreads are doing in that market. I mean, I think there is expectation that that will increase as well.

So I would expect that there will continue to be some increases in interest.

So as we move forward here just based on the market.

And then as I mentioned too in the environment. We're in now and that's growing market share growing finance receivables that results in higher debt balances as well.

Okay understood. Thanks, so much.

Thank you once again Thats Star one star one one for questions.

One moment for questions.

I'm not showing any further questions in the queue at this moment.

Okay.

Thank you once again, thanks, everybody for listening in.

We've been in business for over 41 years, we've gone through a number of.

Of cycles.

<unk> cycles.

And.

When we do see some disruption.

Always come out the other end in better shape, and we expect once again.

As we set our company up to handle more customers and handle more growth and be more productive and leverage SG&A.

When these headwinds we're seeing now do switch.

We're going to be in a great spot to take advantage.

Of what our company does and what we do so well.

So we appreciate everybody thanks to all of our associates for their dedication and hard work to what we do well.

We're very proud of our company.

Very proud of where we're at and we're extremely excited.

Our future and our place in the world. So thank you and have a good day.

Okay.

The conference will begin shortly to raise your hand during Q&A you can dial.

One.